Eligibility of a Free Zone company to claim 0% Corporate Tax in UAE

UAE has introduced Corporate Tax with effect from 01, June 2023 along with many reliefs, exemptions and benefits to the taxpayers of the country. One among them is 0% Corporate Tax for Free Zone companies in UAE. All the Free Zone companies in UAE can avail of these benefits as long as certain conditions are satisfied. In this blog, we are going to delve into the conditions for a Free Zone company to become eligible for 0% Corporate Tax in UAE.

Step-1
The first condition as specified in the UAE Corporate Tax Law is that the Free Zone Company is a company which is registered in any free zone as per the UAE rules and regulations. A Free Zone company can voluntarily choose 9% Corporate Tax rate or opt for a 0% Corporate Tax rate which should be a wise call in the first tax year. The opted tax rate cannot be changed in the current tax year and the coming 4 tax years. In short, the tax rate opting for a Free Zone Company in the first tax year is irrevocable for 5 years. Those who opt voluntary 9% Corporate Tax rate can become eligible for all the reliefs and benefits specified in the UAE Corporate Tax Law. Example:- A Free Zone company who opted voluntary 9% Corporate Tax rate can avail of Small Business Relief, 0% Corporate Tax on the taxable profit up to AED 375,000/-. On the other hand, a Free Zone company that opts 0% Corporate Tax rate shall satisfy all the conditions specified in the UAE Corporate Tax Law and if any conditions are violated, the Free Zone company shall cease to become eligible for 0% Corporate Tax in the year of violation as well as coming 4 tax years. So, the Free Zone company owners shall analyze their standing under the Corporate Tax Law and make a proper decision in the first tax year. 

Step-2
The second stage of determining a Free Zone company’s eligibility under UAE Corporate Tax Law is understanding the revenue source of the Free Zone Company and the location of the customers. If a Free Zone company gets their income from another Free Zone company, the income shall be eligible for 0% Corporate Tax unless the income is generated from the below activities which are called excluded activities;
•    Any transaction with a natural person, except in a few special cases.
•    Banking activities
•    Insurance activities 
•    Finance and Leasing activities.
•    Income from properties, except the income generated from another Free Zone company from commercial properties located inside the Free Zone area.

In case the Free Zone entity is getting income from outside the Free Zone, (from Mainland companies and foreign companies), such income can be eligible for 0% Corporate Tax only if;
•    Such income is not generated from excluded activities (listed above).
•    Such income is generated from Qualifying Activities. Below is the list of Qualifying Activities listed in the Ministerial Decision No. (265) of 2023.

Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
o    Manufacturing of goods or materials.
o    Processing of goods or materials.
o    Trading of Qualifying Commodities.
o    Holding of shares and other securities for investment purposes.
o    Ownership, management and operation of Ships.
o    Reinsurance services.
o    Fund management services.
o    Wealth and investment management services.
o    Headquarter services to Related Parties.
o    Treasury and financing services to Related Parties.
o    Financing and leasing of Aircrafts.
o    Distribution of goods or materials in or from a Designated Zone.
o    Logistics services.
o    Any activities that are ancillary to the Qualifying Activities specified in paragraphs (a) to (m) of this Clause.

Now you must have understood the types of income which are eligible for 0% Corporate Tax in UAE. Let us continue reading to understand the other conditions to be satisfied

Step-3
A Free Zone company must have adequate substance inside the Free Zone. The substance can be simply defined as the presence of a company inside the Free Zone. Article 8 of Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, explained the substance requirement. Let us understand in simple words.
a)  Free Zone Company shall undertake the income-generating activities inside the Free Zone. This means that a Free Zone company, depending on their business activity, shall determine the main activity they conduct to generate their income and those activities shall be conducted inside Free Zone.
b)  In order to undertake the core income-generating activities inside the Free Zone, the company must have an adequate number of employees, adequate assets and adequate operation expenditures inside the Free Zone.

Step-4
In order to be eligible for 0% Corporate Tax in UAE by a Free Zone company, the submission of the audited financial statement is mandatory. With this condition, the authority wants the third-party auditor to affirm the figures mentioned in the books of accounts.

Step-5
A Free Zone entity which is having a related party transaction or connected person payment must comply with the Arm’s Length Principle. The authority wants to make sure that the companies are not trying to shift their profit from high-tax jurisdiction or mainland UAE into a Free Zone and claim 0% Corporate Tax.

Step-6
From the announcement done by the UAE Tax Authority so far, the last condition to be satisfied is “De-minims Threshold”. Let us understand this concept through some scenarios. A Free Zone may earn both qualifying income (the income which is eligible for 0% UAE Corporate Tax) and non-qualifying income (the income which is not eligible for 0% Corporate Tax). In such a situation, to satisfy the de-minims threshold, a Free Zone company shall limit their non-qualifying income in a year to below 5% of the total revenue or 5 Million Dirhams whichever is lower. 
Keep in mind that, all the above conditions shall be satisfied by a Free Zone company to become eligible for 0% Corporate Tax in UAE. Violation of a single condition will cease the Free Zone entity to become eligible for 0% Corporate Tax in the current year and the coming 4 years.

Let us conclude this topic with the revision of Step-1 which is determining the tax rate in the first tax year, whether 0% or voluntary opting for 9%, is very crucial since it will affect your tax planning in the subsequent 4 tax years.

To learn more about How to Determine the Eligibility of a Free Zone Company to Claim 0% Corporate Tax in UAE?, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.